When Banking is Unfair and Deceptive

The Comptroller of the Currency has entered into a settlement with Providian National Bank. The settlement order is based on unfair and deceptive trade practices and has far-reaching implications for the banking industry.

This agreement is based almost exclusively on a finding of unfair and deceptive practices. The authority for the agreement comes from the Federal Trade Commission Act which broadly prohibits unfair and deceptive trade practices. The bank regulatory agencies have authority under this act to take action to stop or prevent trade unfair or deceptive practices by financial institutions.

The OCC also alleged that the practices were unsafe and unsound within the meaning of the Federal Deposit Insurance Act. The OCC did not base its case on any of the usual consumer protection laws.

Unfair and Deceptive Trade Practices
Unfair and deceptive practices ("U&D") has been an area of law that has not received much attention in the world of banking. The lead agency for U&D is the Federal Trade Commission. The FTC relies on this authority when it brings actions on credit clinic scams and similar practices. The banking agencies have done little with their U&D authority.

Essentially, an unfair or deceptive trade practice is one that takes advantage of the consumer. This may occur because the institution withholds information or actually misrepresents information. It may also occur because the institution presents information that is misleading to consumers. The bait and switch tactic of selling is a >
For several years, the bank regulatory agencies have been issuing warnings about unfair and deceptive trade practices. Unfair and deceptive practices have been discussed in the context of concerns dealt with directly by laws such as privacy. But U&D issues also stand alone - without specific statutory attention. That is precisely what happened in this case.

The Agreement
The agreement reached provides for substantial and costly remedies. It is much more than a slap on the hand. The corrective action will involve the payment of at least $300 million to affected consumers. The damages may climb higher. The OCC stressed that $300 million is the minimum amount that Providian must repay.

If you measure an enforcement action by the amount of attention the agency gives it, this one scores high. Not only is it announced with a three-page press release (three full pages at that), it is supported by a statement from John D. Hawke, Jr., the Comptroller of the Currency. Hawke's statement is strong and unambiguous.

"When a bank engages in unfair or deceptive marketing practices, it damages its most precious asset - the trust and confidence of its customers. That relationship of trust and confidence is central to the bank's safe and sound operation. We will not tolerate abuses that breach that trust through unfair and deceptive practices."

Hawke also stated that consumers "should not have to become detectives to find out the true terms and conditions of their credit card agreement."

What Providian Was Doing
Providian was using aggressive marketing tactics to induce consumers to accept their product. The marketing materials, including telemarketer scripts, did not fully explain the costs and conditions of the product. The marketing touted the "advantages" without explaining the very costly strings attached to the advantages. After accepting the product, consumers discovered - to their dismay - that the advantages they thought they were purchasing were not available to them. Instead they had a fairly expensive product and would actually pay a penalty to cancel the product.

Providian was marketing a product without informing the consumers about important details related to the product. Specifically, the institution did not disclose the significant limitations on the product they were selling. The product involved a credit card with certain features including credit protection for unemployment, hospitalization, accident, sickness, or disability. What the telemarketers did not explain was that these insurance policies came at a price and with restrictions.

The insurance was not available until the cardholder had made at least 3 payments and benefits were limited to the number of months the consumer had made payments on the credit plan. Consumers were not told that the benefits could be denied if the card was not current or was over the limit. Unemployment benefits would not be available to customers with part time jobs.

The bank could also deny benefits if the customer made more than the minimum payment on any other credit account, if the customer used any other institution's credit card, or accessed credit from any other lender.

These deceptive practices were not the only ones. Providian also offered an account with "no annual membership fee." What the bank did not tell customers was that the no fee card was only available if the customer purchased credit protection. The consumer could avoid an annual fee of $30 - $60 by paying $156 a year for credit protection.

The bank offered a "Real Check" program, offering a bonus of $200 to customers who transferred balances. What they did not tell the customer until afterwards was that the bonus was only available if the customer transferred at least $10,000 in a single promotion.

This issue of Compliance Action includes a training page concerning the specific practices identified as unfair or deceptive.

Not Discussed
There are elements of specific consumer protection laws that could have been addressed in this action, but were not. These remain possibilities, especially for consumers. For example, the marketing and subsequent practices could have Regulation Z consequences. It also appears that some of the marketing practices and credit policies could have consequences under ECOA. For example, the unemployment insurance was not available to individuals who worked a part-time job, even if that was their only source of income. An interested plaintiff's lawyer could have a field day.What does this case mean? For financial institutions, this case sets a clear precedent for unfair and deceptive trade practice authority. It takes the analysis of how banks do business far beyond the familiar compliance laws. This case is not confined by Regulation Z or Fair Credit Reporting. It is defined by fairness and honesty in business.

The investigation drew on an analysis of the product together with the telemarketing scripts. The OCC took note of how telemarketers were coached to sell the product. It took further note of how telemarketers were coached to answer questions by not answering questions.

This case makes the compliance program much more than a program to comply with specific laws. This means that the compliance program should grow into the corporate conscience. A compliance program that is based only on specific laws will not be enough.

ACTION STEPS

Brief your board, senior management, and the heads of all lines of business within the bank about this case. Be sure to explain the impact this case could have on bank practices.
Step up as the manager of business ethics in your institution. Make fairness of product design and sales techniques a regular part of your compliance review.
Look at the spirit of the existing consumer protection laws. These are all based on specific practices that treat customers unfairly or take unfair advantage of them. Consider whether your institution is complying with only the letter of the law - or whether you reach to the spirit of each law.
Play detective with your bank's marketing information and products. Compare the information stated and implied in marketing communications with the actual product. Decide how honest the bank is being.
Review the list of activities that the OCC identified as unfair or deceptive. Then scrutinize your institutions practices to see if there are any similar practices. If so, get rid of them now!